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Corporate debt restructuring cases to come

under scanner
Takru says will block flow of huge number of firms for CDR, conduct detailed review of
cases
Abhijit Lele | Mumbai
September 7, 2013 Last Updated at 00:55 IST

The government is set to carry out a performance review of companies that have opted for
corporate debt restructuring (CDR). This follows various steps taken to curtail the virtually
unchecked flow of CDR cases.

There has been concern on the growing number of companies opting for a debt recast. The
Reserve Bank of India (RBI) had implemented strict norms to ensure only genuine units took
this route. However, the performances and operations of companies in the CDR cell are often
overlooked. Many of these have been under CDR protection for years, without any incentive
to move out.

Rajiv Takru, secretary, Department of Financial Services, said the first step would be to block
the flow of the huge number to companies to the CDR platform. A detailed review of existing
cases would be next. There is a thought to scrutinise each case (and the respective
companys performance) which is under the CDR package, Takru told Business Standard.
The details of the timeframe and the mode of review are yet to be worked out.

Takrus message comes just two days after Reserve Bank of India Governor Raghuram Rajan
sent a strong message to company promoters in his first media conference. Rajan said
promoters did not have a divine right to stay in charge regardless of how badly they
mismanage an enterprise, nor do they have the right to use the banking system to recapitalise
their failed ventures. He has also asked Deputy Governor K C Chakrabarty to take a close
look at the restructuring and recovery process and said next steps would be taken shortly.

Debt restructuring is a tool to offer aid to borrowers in distress, owing to circumstances
beyond the borrowers control such as a general downturn in the economy or a sector. It
might also be warranted by legal or other issues that cause delays, particularly in cases of
project implementation.

As of June, lenders had approved CDR packages for 415 companies, with aggregate debt of
Rs 2,50,279 crore. The iron and steel sector accounted for the most Rs 53,543 crore. A
year earlier, 309 cases, with aggregate debt of Rs 1,68,472 crore, were on the CDR platform.
Admitting to the lack of a
detailed performance check,
senior public sector bank
executive said hit by the
economic slowdown and
adverse industry-specific
developments, many units
were in need of help. But some
had remained in this platform
for long and continued to enjoy
protection, without making
any move to step out.

The extraordinary rise in cases
referred to and reworked under CDR led to questions whether the trend was due to the
general downturn or a gross misuse of the facility by banks and companies.

An IDBI bank official said the governments move to carry out an analysis was constructive.
It has to bring lenders on board for the review. This will also send a signal that CDR support
is not available for perpetuity.

According to an RBI analysis carried out before the strict recast norms were announced, the
rise in references to CDR could be partly due to excessive leveraging by a few borrowers
during the economic boom. There were deficiencies in project appraisals conducted for cash-
flow analyses and determination of the date of completion of projects.

When commercial operations were delayed, a host of factors, including uncertainties
surrounding a project, were cited as reasons.

But in the case of uncertainties, these had to be accounted for during the appraisal of the
project and a proper cushion had to be built to take care of these uncertainties, RBI said.

An investment banker said there was room to improve the system to monitor entities after
restructuring. Those involved in advising recast (such as State Bank of India Capital Markets
and IDBI Capital) had to be held accountable for the fate of companies, the banker added.

The move seems to be aimed at appraising projects, keeping in mind aggressive repayment
schedules. RBI had earlier said this led to a short-term focus by borrowers, banks and
financial analysts and created the need for successive restructuring.

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